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Saturday December 3rd, 2022

Sri Lanka tax-payers left guessing after latest tax upheaval

ECONOMYNEXT – Sri Lanka’s latest tax upheaval from the 2022 budget which has repeated a ‘super gains tax’ to penalize large firms and brought back a cascading turnover tax instead has left many tax payers guessing over their application.

Sri Lanka had to impose higher taxes to cover expenses after a steep cut in value added tax in 2019 without a sitting parliament de-stabilized state finances after the state was expanded from 17 percent of GDP to over 20 percent under an unusually statist ‘revenue based fiscal consolidation’ strategy.

Exporters are likely to face a non-recoverable turnover tax from the social security tax, unlike the earlier higher rate VAT which does not hurt external competitiveness. Price controlled industries like pharmaceuticals would also be squeezed.

Super gains tax ‘normalized

In the 2022 budget a ‘super gains tax’ where large companies are targeted with a windfall style tax was repeated retrospectively, normalizing an additional ‘regime uncertainty’ to the country’s policy framework which began in 2015, critics say.

Private firms and chambers had sought clarity from authority while some industry groups were engaged in intense lobbying to minimize the effects of some of the new taxes.

The 2022 super gains tax is to charge an additional 25 percent from large companies that earn more than 2.0 billion rupees in profits, where returns have to be filed by end November.

“The issues that are not clear at the moment is whether the tax will be applicable across the board for all companies irrespective of their tax rates,” Duminda Hulangamuwa Senior Partner and Head of Tax of Ernst and Young in Sri Lanka told representatives of the top German brands in Sri Lanka.

“There are companies with 14 percent (corporate income) tax rates, there are companies with 15 percent, there are companies with 18 percent and 24 percent.

“My presumption is that it will go across the board in order to get the 100 billion rupee revenue to all industries, unless there is a development to that.”

There are also companies which are exempt from taxes.

About 80 billion rupees extra had been spent on the Coronavirus vaccines which had benefitted everyone. However questions are being asked by Chambers and others why only a selected few are being made to pay and not everyone.

“That is a call the government has to make. I am ok with either, but that is what people are saying,” Hulangamuwa explained.

There was also no information if marginal relief would be given to companies in the borderline.

“For example someone at 2.0 billion and one would pay, and a person at 1999 would not pay,” Hulangamuwa said.

“So someone at 1999 would get away and someone at 2001 would pay. There is no marginal relief to a person becoming short of just one rupee.”

In larger business groups, companies get dividends. The dividends are taxed by the declaring company already. The profits are taxed and the dividends are taxed at 14 percent.

If the recipient company goes over 2.0 billion taxes will have to be paid again.

“I do not think those are issues that have been addressed yet,” Hulangamuwa said. “I think these are issues that have to be addressed by the government when enacting the law into implementation.

“Now the question is who wants to be in the billion rupee club?”

The Rule of Law

Companies who had earned two billion had already used them for re-investment for expansion based on existing law. Some have also paid dividends and bonuses to workers.

“So they do not have cash though the profits are there to pay the tax. So these are the questions that are coming up. There are no answers to be given at the moment. Some are being taken up by the Chambers etc, but the final solution I do not have as to how and what base the tax will be levied on.”

The lack stable laws bring in what economists call ‘regime uncertainty‘, undermining rule of law, which analysts have said is one of the three biggest drawbacks the country faces along with monetary instability and nationalism.

“Nothing distinguishes more clearly a free country from a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law,” explains economist Friedrich von Hayek, in his work The Road to Serfdom.

“Stripped of technicalities this means that government in all its actions is bound by rules fixed and announced beforehand – rules that make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.

“Thus, within the known rules of the game, the individual is free to pursue his personal ends, certain that the powers of government will not be used deliberately to frustrate his efforts.”

“Hence the familiar fact that the more the state ‘plans’, the more difficult planning becomes for the individual.”

The super gains tax was introduced by the ousted ‘Yahapalana administration’ which pushed up state spending through a 100 day program and it has now opened a pandora’s box of uncertainty for large companies. It was then promised to be one time.

An extra 3 percent tax was charged on banks calling it the financial VAT replacing a removed 3 percent Nation Building Tax.

“So they pay the NPB back as a VAT on financial services.”

Banks are likely to pay around 70 percent in taxes for the last financial year.

Changes to the VAT was only in respect to donations made to government.

In most European countries VAT was close to 20 percent and in Sri Lanka it has been brought down to 8 percent from an earlier 15 percent as part of the sudden tax changes in 2019.

However VAT is neutral for exporters and does not hurt export the global competitiveness of export industries or services.

Cascading NBT returns

In the budget for 2022 another new tax had been brought calling it the ‘social security contribution’ at 2.5 percent.

“This is similar to the Nation Building Tax that was abolished last year. It was a tax on turnover, and this will also be a tax on turnover, except that the rate is half a percent more.

He said clarity was being sought on the tax base and on exemptions.

“When a tax is introduced we find a lot of people lobbying for their industry,” he said. “It will directly after the bottom line. You do not keep 2.5 percent on bottom-line.

“The retailers, the distributors, low margin companies, bunkering and price controlled industries like pharmaceuticals they are unable to increase their prices because of the 2.5 percent.

“I believe the government will give relief to the industries that are at a low margin level.”

Analysts say cascading taxes will generally result in higher prices.

“The next of course is exporters,” he said. “They are screaming saying that 2.5 percent under current circumstance where margins are challenging, markets are challenging that they cannot afford to pay the 2.5 percent.

“So, all these matters had been discussed with relevant government officers – the Treasury especially. And I believe there will be some relief and these matters will be addressed as we go along.” (Colombo/Nov28/2021)

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Sri Lanka teachers struggle to abide by saree ‘law’

ECONOMYNEXT – Sri Lanka’s school teachers are struggling to continue the service with the ongoing high inflation destroying their salaries and with on ongoing battle to wear more affordable clothing than the traditional saree while.

With the country is going through its worst currency crisis in the history of its central bank, teachers say the rapid inflation in the country has forced them to go with more affordable clothing than the traditional attire of saree.

Price Shock

“Wearing sarees are a big cost, you need to iron and we have electricity tariffs, textile industry is collapsing and in turn prices are increasing” AM Chandani, an Advanced Level teacher for Mathematics told EconomyNext.

The traditional saree, is considered as the appropriate attire for all female teachers in the country, even though it has not been officially declared under any law. Students wear frocks.

Teachers says while sarees do bring a level of respect and formality, they don’t determine productivity and the quality to education.

“Quality of education is measured through the syllabus and depends on the skills of the educator, but not on what the teacher is wearing, why is education determined by a saree?” Chandani says.

“Saree prices have risen by nearly 50 percent, electricity prices had risen by 75 percent, transportation costs are also increasing and on top of that food inflation is also present in Sri Lanka. How do you expect one to save in a condition like this?”

Pontificating Ministers

At least two ministers wearing Western jacket and tie have pontificated on teachers’ dress.

“The minister for education and other ministers are busy making proclamations on what teachers should wear to school,” Sujata Gamage & Tara de Mel Co-coordinators, Education Forum Sri Lanka said in a statement.

“There is no indication that they have consulted the main stakeholders in this case, the teachers.

There is already a guideline on attire for teachers in Section 5.1.b of Circular 2012/3 on “Code of Ethics and General Rules on the Ethical Conduct of Teachers”. Specifically, teachers are required to:

“Dress in culturally appropriate, clean, smart, and well-tailored clothing, maintaining decency and modesty, at all times.”

“Insisting that the saree is the only appropriate attire, especially at this time when the teachers are struggling to provide for their families, get to work on time, and teach kids who are very likely to come undernourished or hungry, would be inconsiderate.”

“In addition, it would be a violation of their fundamental rights and a violation of the Constitution where the transfer and disciplinary control of all educational personnel is vested with the provinces.”

Sri Lankan teachers’ salaries were increase in January 2022, after the teachers went on a continuous protest, where an allowance of 5,000 rupees was approved by the Cabinet.

Cost of Working

The electricity tariff was increased last August in order to mitigate the continuous losses made by the state-run Ceylon Electricity Board after the rupee collapse from 200 to 360 to the US dollar after macro-economists printed money to target an output gap.

Fuel, taxi and bus fares and food prices also went up with economists printing money.

Sr Lanka’s Ceylon Teachers Union (Check the exact name) said, on average, teachers get paid from 50,000 to 80,000 a month and, the union plans to go into discussions about the education system, rising cost of education as well as the salary offered to teachers.

“Teacher’s salaries are disappearing because the cost of living has risen… and the cost of working is also increasing such as buying of sarees and transport, this will cause an explosion in the education sector” Joseph Stalin, the teachers Union secretary told EconomyNext.

Meanwhile, Minister of Education Susil Premajayantha told parliament on December 01, that relief would be aided to teachers that are unable to afford sarees after media reports showed that teachers found it financially difficult. 

“Even if the government doesn’t approve allocations, I will make sure that aid is being provided to teachers finding it difficult to afford school attire,” Premajayantha said. (Colombo/Dec02/2022)

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Sri Lanka shares ends five week high on easing rate expectations

ECONOMYNEXT – Sri Lanka shares gained for the sixth session on Friday closing on positive sentiments due to expectations of easing market interest rates and generated the highest turnover in two months, brokers said.

The main All Share Price Index (ASPI) closed 0.61 percent or 65.94 points higher at 8,769.73, the highest index gain since October 27.

The market witnessed a turnover of 4 billion rupees, higher than this year’s daily average turnover of 3 billion rupees. This is the highest turnover generated since September 27.

The market saw a foreign inflow of 1 billion rupees, the highest inflow since September 27. The total net foreign inflow stood at 20.2 billion rupees so far for this year.

“Most of the treasury counters gained today with the speculation for interest rates to ease with the inflation therefore treasury shares gained,” a market analyst said.

Analysts said Lanka IOC gained with the government keeping the fuel prices unchanged while global prices fell.

Former Central Bank Governor Indrajit Coomaraswamy said in a forum on Monday that the government is in discussions with Asian Development Bank (ADB) and World Bank to get loans of 1.9 billion US dollars after a reform program with the International Monetary Fund is approved.

A policy loan now being discussed with the World Bank may bring around 700 million US dollars, Coomaraswamy told a business forum organized by CT CLSA Securities, a Colombo-based brokerage.

The Asian Development Bank may also give around 1.2 billion US dollars most of which will be budget support, he said.

In the last few sessions market gained after the Central bank governor said market rates should eventually ease despite the fears of a domestic debt restructuring as inflation falls, increased liquidity in dollar markets, and the inter-bank liquidity improves.

In the past sessions, the index continued to fall on the speculation of a local debt restructuring although no proper decision has been taken so far.

The more liquid index S&P SL20 closed 1.27 percent or 34.86 points higher at 2,774.60.

So far in December ASPI gained 1.3 percent.

The ASPI gained 0.5 percent in November after losing 13.4 percent in October.

It has lost 28.2 percent year-to-date after being one of the world’s best stock markets with an 80 percent return last year when large volumes of money were printed.

Sampath Bank pushed the index up to close at 10.8 percent to 39.9 rupees.

Other top gainers were Lanka IOC gained 6.2 percent to close at 206.8 rupees and Commercial Bank gained 1.8 percent to close at 51 rupees. (Colombo/Dec02/2022)

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Sri Lanka State Tourism Minister backs night life with with 24*7 operation of wine stores

ECONOMYNEXT – Sri Lanka’s State Tourism Minister Diana Gamage wants the island nation’s wine stores to opened all the time if the country wants to boost tourism.

Gamage has been vocal on opening up night time life to attract more tourists and boost foreign exchange revenue for the country to move out of the crisis.

“When tourists come, if all they have to do is roam around and go to sleep at 10 pm every night in front of their hotel room TV, then we will not be able to earn dollars from them,” Gamage told the parliament during the Committee Stage debate of Tourism Ministry.

“The issue with our country is, there is no place to go after 10 pm. This is a paradise. I do not know whether anyone knows the meaning of a paradise.”

“We have to keep this place open 24/7. I have spoken it about many time. Liquor is the highest tax earner in the country. In this paradise, we are closing bars after 11pm. Foreigners in hotels can’t get any alcohol if they need. Because all the places are close. We need to keep this country open 24 hours. Like Singapore and other countries. People must have to have entertainment.”

Gamage’s proposals for night life have been frowned at by some religious leaders citing that the move is against Sri Lanka’s rich and ancient culture.

“I talk about the night life, and when I talked about that earlier many criticized it and saw it as a big sin. That is ones who are incapable of understanding it,” she said.

“What we call night life is actually is a night economy. All the countries in the world have developed because of night economy. These countries get 70 percent of their income from the nigh economy. They only get 30 percent during the day time.”

“We have to develop a night economy in this country. That will earn 70 percent of the income. Only that can develop this country.”

“We can do that. And also our museum, that closes at 5 pm. In other museums earn most during night. It must be opened 24/7.  This night economy is essential for a country’s economy. People must have places t spend their money.” (Colombo/Dec02/2022)

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